Valuation Of Real Estate

( Originally Published 1924 )

Questions

What general economic law does the value of real estate follow? What are the factors that determine the supply of land? What relationship is there between the cost of bringing land into use and the supply of land? Why would the value of land probably fall if population should remain constant? What effect does the cost of production have on the value of farm land? the distance from market? good roads? Explain the capitalization of rent. What features are essential to a manufacturing site? To a wholesale site? To a retail site? To a residential site? Why does the suitability of improvements to their location affect largely the value of real estate? How is the value of a lot found by the capitalization of income method? What two factors must be carefully considered in estimating the value of buildings? How can an unimproved lot be valued? What are some of the common rules for distributing values over the depth of a lot? What is corner influence?

IN order to deal intelligently in any commodity, a man must be able to judge its value; real estate dealing is no exception to the rule. No man can expect to succeed without this fundamental equipment. But judging the value of real estate is a highly complicated problem—one which requires for its solution the accumulated wisdom
of experience as well as the knowledge of underlying principles. Experience can be greatly assisted by knowledge; in other words, upon problems which are constantly confronted in experience, a flood of light may be thrown by acquaintance with fundamental principles. While the value of a specific piece of property will in every case be affected by forces beyond the purview of general principles, and must be arrived at by a particular procedure, it follows certain general laws which are sufficiently universal in character to be spoken of as principles.

Real Estate Values Follow Certain Economic Laws. The basis of value in real estate is the same as that in any other valuable thing. The value of real estate arises from its desirability and its scarcity—another way of stating that it depends upon the demand and the supply. An analysis of the demand for real estate and of its supply would enable one to arrive at its value, and changes in one or the other of these forces would bring a change in value. It remains, then, to determine what constitutes the desirability of real estate, and what the source of its scarcity ; that is, its demand and supply.

There are three factors which chiefly affect the supply of land : the actual amount of the earth's surface, the cost of bringing into use those parts of this surface which are not now being used, and the proportion between available land supply and population. The first of these factors is relatively fixed and unchangeable; while small tracts of land may be made available by drainage or by filling, the general proportion of the earth which is "dry land" it is impossible to change. The second factor operates upon the well-known law of diminishing returns. Great tracts of desert could be reclaimed by irrigation, barren fields could be made to bring forth produce by processes of fertilization and tilling, but the costs of bringing these tracts into use would be so great that so far, on the whole, they are left unproductive. It is frequently considered an economic waste to let these tracts of barren land lie idle.

But a much greater waste. would be involved in bringing them into use. To expend labor and capital upon them when it might be put to greater productive use upon lands that are already producing is like "throwing good money after bad."' For lack of appreciation of this principle many a dealer has bought and attempted to market farm lands so situated that the cost of putting them under cultivation was so great as to doom his efforts beforehand inevitably to failure; city real estate dealers have at-tempted subdivisions which could never succeed because of their natural disadvantages ; and countless investors have found their resources dissipated through an attempt to redeem an unwise purchase of land that was never adapted to the purpose for which they bought it.

The third factor affecting the supply of land is its pro-portion to population. If population is doubled, while the actual amount of land available remains fixed, the supply of land is cut in half for each individual.

But population affects the value of land also by creating new demands for it.

The increase of population calls for the production of more goods, and the production of more goods calls for the utilization of more land or more intensive use of present area. The utilization of more land compels reaching out after the less productive fields and those more difficult to bring into production, while intensive cultivation increases the demand for more land because of the law of diminishing returns; and consequently the value of the land is increased. It would seem, therefore, that the value of land would be in direct proportion to population, but there is one circumstance which intervenes to check this normal tendency. The constant improvement in methods of production enables a larger amount of produce to be secured from the same area of land with the same labor and capital. An improved plan, which would cost no more than an older method, or the substitution of a modern tractor for horse power, though no more expensive than the latter, might enable a farmer to produce a far larger crop. Another example of this principle is seen in the tendency of land to decrease in value in cities whose population is not increasing. The more efficient use of present areas causes the demand for land to decrease with a falling off in value. Thus population might increase just enough to absorb the increased production without causing any change in the values of land; or if population stood still, the value of land would gradually fall. Doubtless some day it will be known what rate of increase in the population must be maintained in order to keep values constant.

The demand for land in cities arises from commercial or residential needs. In general, it will be evident this demand depends directly upon population. Land values will be highest where population is most concentrated and least valuable, as urban land, where population is most thinly scattered.

The elements of value in urban real estate which is used for different purposes are found in the peculiar adaptability of the land for its purpose. Real estate, for example, that is highly desirable for manufacturing purposes is usually equally undesirable for residences. It is necessary, therefore, to examine, first, why real estate is desirable for each of the general purposes for which it is used, and then by what means a definite valuation can be arrived at for a specific property.

Valuation of Agricultural Land. Agricultural land is valued on the whole for its ability to produce marketable commodities. A farm in Iowa depends for its value chiefly upon its production of corn, hogs, and other products ; an orange grove upon the crop of oranges which it can pro-duce, and a grazing ranch upon the value of the beef or wool which can be raised upon it. In addition, in this country nearly every farm provides also a home for the farmer, though this is not so generally true in Europe. In Europe farmers live in villages, and go to and from their fields every day. Consequently, another factor is added to the value of a farm here namely, the value of a home site.

In general, however, the value of a farm is derivative, not primary; that is, the farm derives its value from that of the commodities which it produces, or is capable of producing, and is not of value in itself. Vast stretches of land may be had for the asking in the Sahara Desert or in Dead Man's Valley, while the fertile fields of north-ern Illinois sell for $300 an acre.

But not all land that will produce has value. Some land is so poor or so wet or so dry that it will not produce enough to repay the labor or capital which must be expended to secure the crop. The element, then, of costs must be considered in the valuation of a piece of land, but in general the value of a farm will be determined by the return which it will give to the capital and labor expended upon it in the process of production. Suppose a farmer, by cultivating one field, can obtain a return twice as great as that secured from cultivating another field at the same expense. It is evident that he would value the former twice as highly as the latter, and would pay twice as much for it. Now suppose that he wants to retire and rent these fields, and can secure for the rent of one $700 a year, and for the other $350 a year. His valuation of these fields would now be determined by the rent he could secure from them, and the value of land in general may be roughly measured by the net rent which the owner expects to receive from it.

In the preceding example, the farmer who realizes $700 a year net from his field would value it as much as he would value any other investment which would yield him the same return. At five per cent, $14,000 would yield him $700 a year, and assuming that five per cent is the return which he expects from his investment, the farmer would value his field at $14,000. This method of valuation is known as the capitalization of rent method. Theoretically it is correct, but in application it meets with several limitations.

The first limiting factor is the lack of systematic ac-counts on farms. Many farmers are not bookkeepers, and it is usually impossible to arrive at an estimate of their actual income. No record is kept even of actual expenditures; no charge is made for the labor of any of the members of the family, and in many instances no record is kept even of income received for produce. In such instances obviously it is impossible to arrive at an exact estimate of income, and this method, if used, must produce a very rough approximation of the value of the farm, depending upon the appraiser's ability to guess what the income is. Fortunately the practice of keeping accurate records is growing among farmers.

Secondly, the rate at which the returns should be capitalized is usually lower than the current rate of interest, probably seldom higher than four or five per cent. Competition for investment in farm lands is keen, particularly on the part of tenants and present owners who want to purchase more land for themselves or their families. As a result, values are forced up until there is little chance of securing a market rate of return on the investment.

There are other considerations which operate in the same way toward forcing farm values beyond the income-earning possibilities. (1) Ownership of land gives prestige in a community and is sought for that reason. This factor is more potent in some other countries, such as England, than it is here, but here it is present. (2) In addition, certain amenities are attached to the land and to its utilization that enhance its value.' Prominent among these are the opportunity to live out in the open air and the large degree of freedom on the part of the farmer to order his life as he desires. (3) The farmer is constantly anticipating higher prices and larger income, and the price he asks for his farm is not only what its production would justify, but, in addition, it contains a large amount of anticipated increase in income. The history of farm land values in the United States leads naturally to this point of view. In nearly every section of the country there has been a rising market for farm lands since the various sections were opened for settlement.

Another limitation of the capitalization of rent process is that it assumes that a farm can be rented for what it is worth and no more. In actual practice, however, some farms actually rent for more than they are worth, and others for less. It is commonly said that many farmers in Ireland pay more rent than the land they cultivate can justify, while many of the estates in England, be-cause of certain customs which have grown up around proprietorship, are really liabilities to their owners. The owners receive their income in social prestige and pride in maintaining an estate.

In this country, as already pointed out, the value of a homestead must be added to the value obtained by the capitalization of rent process. Nearly all our farms afford to the farmer more than a tool of production, including such things as a home, a means of saving, and a basis of credit. And there are waves of speculation which ordinarily send land values considerably beyond their production possibilities. Such values as are produced by these movements are dangerous, for they bring about inflation with consequent losses. The real estate dealer should strive to keep farm values on a substantial basis by discouraging such movements.

But waiving these considerations for the moment, what are the factors to be considered in this capitalization of rent process? For obviously not all the value of the produce of a farm can be capitalized; the costs of producing it must first be deducted. Thus, for example, a farmer who, by the expenditure of a thousand dollars, realized a return of $I,200, would not capitalize his total return, but only the $200 which represents his net profit. This calculation involves a careful system of accounting, which will show accurately the costs of production and of marketing as well. If the real estate dealer could have such a set of books placed at his service, he could much more accurately estimate the value of a farm.

The careful keeping of such a set of accounts will show the net income. It is evident that each factor enumerated under "expenditures" is important, though some of them are overlooked frequently. Take cost of marketing, for example. This is affected by the facilities for marketing, such as good roads,' and the means used to market, such as trucks. Unfortunately we are not yet able to determine exactly what allowance must be made for an increased distance of a mile or two miles from a market. Research in the future will undoubtedly enable us to determine this point more or less accurately.

A correction must be made here, however, for the ability of the farmer. If he is a poor manager, he may not bring out the possibilities of the farm, and his statement must be corrected according to the best estimate that can be made of a good manager's increasing the productivity.

Other considerations affecting the value of farm land can only be estimated in view of the actual case under consideration. Here should be placed the estimate of the value of the site of the farmhouse, the nearness to school and to church or to a community center. These considerations will have different weight with different families. Their value may always be added to the capitalized value of the farm income, for they are as distinct an element in the value of a farm and as truly a part of the income which the owner receives, as the money obtained for its produce.

Valuation of Urban Real Estate. The valuation of urban real estate depends not upon the ability of the soil to produce, but rather upon its location in relation to social factors such as population, public utilities, etc. As in the case of agricultural land, the value of most urban land, particularly that used for business, is not primary, but derivative in this case derived from the possibility of utilization for some gainful purpose. The greater the possibility of gain, the larger the value of the lot. The most important consideration in the value of urban real estate, then, is how can it be utilized.

There are three common urban uses of real estate, each of which makes different demands upon it. These uses are (1) manufacturing, (2) mercantile,' and (3) residential.

Factors Determining the Value of Real Estate for Manufacturing Purposes. What are the features which make one site more attractive to a manufacturer than an-other?

In the first place a manufacturing plant must possess certain natural advantages, such as nearness to the source of raw materials and the possibility of disposing of waste and sewage at least expense. These features are potent in determining the site of a whole city,' as well as the location of a manufacturing plant within the city.

Secondly, the manufacturer must have certain public utilities. A dependable water supply is indispensable; the ability to purchase power, particularly electric power, at reasonable rates frequently is determining; while adequate transportation for raw materials, finished goods, and workmen is paramount. A factory cannot be hampered by indirect or slow access to railways or waterways, nor by an increased cost in getting goods to and from them.

Other factors determining site are the cost of land, and availability of homes for laborers. Many cities through civic organization, such as the Chamber of Commerce, offer free industrial sites as an inducement to secure the increased business which an industrial plant brings. This is in essence a subsidy that does not overcome the natural handicap which may attach to the site, and is consequently dangerous for a manufacturer to consider too seriously. But it is a factor in determining his location. The accessibility of laborers' homes is obviously necessary; the factory would be seriously handicapped in bidding for labor if it were so located as to be very difficult to reach from laborers' residential sections.

In the absence of any of these desirable features, the value of the lot is diminished, sometimes out of proportion to the cost of supplying them. Thus the value of a lot which has no railway facilities is said in general to be diminished about fifty per cent if the spur track can-not be laid. As a matter of logic, the track, if laid, should add its cost of construction to the value of the lot. But practically it adds nothing, for more usually than not the track has to be relaid to meet the needs of the new industry. It is the possibility of having access to the railway that is important. And so with the other features. Their presence or absence actually determines the suitability of the site. If it is suitable, with all the desirable features present, its value in dollars will be determined by its earning power ; that is, the possibilities in the site. This is in accordance with the principle set forth on page 116 in connection with the valuation of the specific property.

Factors Determining the Value of Real Estate for Mercantile Purposes. The mercantile section of many cities consists of three parts, the financial and office section, the wholesale section, and the retail section. The financial and office section is usually very close to or in the midst of the retail section.' Values in this section, consequently, can be judged upon the same basis as those in the retail section. But the demands of a wholesale section are different.

The value of real estate for wholesale purposes depends upon (I) accessibility to railway facilities, (2) convenience to buyers, (3) the availability of banking and other necessary facilities, and (4) the prestige attaching to the location.

Accessibility to railway facilities is not so important to the wholesaler as to the manufacturer, but is nevertheless an important consideration, particularly to the wholesalers of heavy and bulky products. In the consideration of convenience to buyers is to be found the explanation of the wholesale district itself. For it is more convenient for the buyers to have all the wholesale houses grouped together in a district than to have them scattered. The same explanation accounts for retail shopping districts. The whole purpose of trade is to cater to the desires of the buyer, and if his convenience dictates a wholesale center, a wholesale center springs up. The availability of banking and other necessary facilities is an obvious advantage, but not a necessity. Considerably more importance is given to the prestige attaching to a location by a wholesaler than by a manufacturer. Buyers are constantly visiting the wholesaler's establishment, and he cannot afford to be in a location that would create an unfavorable impression.

All these advantages are reflected in the rental which is received for wholesale sites. In order to arrive at their cash value, the same process is necessary as that used in connection with retail sites, which is discussed on page 1i9.

The value of real estate for retail purposes is determined by the amount of the traffic which passes by, and its character. Chain stores, and other progressive and scientific merchandisers, before leasing or buying a site for a store, count the number of passers-by at different hours and on different days. The type of passers-by is also carefully noted so that the average amount of merchandise which could be sold in a year is very accurately estimated, and thus the rental or value of the site arrived at.' Sites which are passed by the poorer classes or by those who are not in a buying mood are not so valuable as those where the traffic is more receptive to the merchant's offerings. The larger the city, the larger the number of passersby, the greater their wealth and their buying capacity. Therefore, the demand for the most profitable corners in large cities becomes very great and their value increases proportionately.

Fashion is a large factor in determining the value of retail sites; a high class retail store could not be conducted. profitably in a cheap section, nor a cheap store to best advantage in an exclusive section. This is a matter of adjusting the services rendered by a site to the demands of those who pass by. The wealthy class will not drive through the Bowery to make their purchases. But their purchasing power makes their patronage very profitable. Therefore, the sites most convenient to them are most valuable.

Factors Determining the Value of Real Estate for Residential Purposes. Just as in the other cases of valuation, so in the valuation of residence property there are a number of elements. Most prominent of these are (1) natural advantages, (2) civic advantages, (3) the rate and state of a city's growth, (4) the character of the community. In the first place, desirable residence property must possess certain natural advantages. Healthfulness is one of the most important of these, and since healthfulness is so essentially an accompaniment of fresh air and plenty of sunshine, those sections which are to some degree elevated and apart from the noise, dust, and dirt of the city are favored. The elevations also give a good view, a wider perspective and outlook. All these factors must operate within the limits of convenience, for however beautiful or naturally advantageous a site, if too far away from the center of the business section of a city, the property cannot be so valuable.' This limitation, however, is merely one of time, not necessarily one of distance. The suburb of a city may be more valuable than city residential property itself if transportation facilities are such as to enable residents to get back and forth quickly.

The civic advantages available in a section such as churches, schools, etc., are of importance. Although these usually will come if the community consists of progressive and well-to-do citizens, their very presence is a surety of the present value of the district while their anticipated coming is always uncertain.

The rate and state of the city's growth is a very vital factor. In many of our cities this is a very disturbing element in value. What was five or ten years ago the most desirable residential section of some of our rapidly growing cities today is for a number of reasons a very undesirable section; the growth of the business section, for example, encroaching upon the residence section, practically destroys the value of the residences. The land itself in most cases gains in value, if held long enough; but it is no longer desirable as a residential section. The erection of a public garage, a manufacturing plant, or a small unsightly grocery store causes a decrease in residential value.

The most important consideration in determining the value of residential property is the character of the community. Sections which possess all the natural advantages that make for valuable residential property are sometimes very cheap because of the character of their residents and improvements, while sometimes a relatively poor location may be so improved and so restricted as to greatly enhance its natural value. It is a matter of common observation that the purchase of property by certain racial types is very likely to diminish the value of other property in the section. In general people of similar social standing live near together. Thus if a professional man is looking for a house site, he prefers to go where the homes are of the general type which he expects to build. Like-wise the laborer prefers the section where the homes are of the sort he expects to build because the standard of living in such a neighborhood is more nearly the same as his. In the exclusive neighborhood the laborer would frequently feel ill at ease. He would also find that his income would not enable him to build or keep up the kind of home prevalent in the neighborhood.

The ability of the rich to pay larger prices for their sites and subsequently to build expensive homes that further enhance land values causes property values in exclusive residential districts sometimes to go very high. A person is limited in the amount he can pay for a house only by his wealth. The income which he expects from his house is purely a psychic one and he can afford to pay any sum he considers it worth to live in the neighborhood he selects. He need not ever expect to realize what he in-vests; he spends for consumption, not for production purposes. A study of incomes and sales prices in the district is therefore necessary to determine the value of property in an exclusive residential section.

The Valuation of the Specific Property. There are two distinct elements in the value of any urban real estate—the land itself and any improvements which may be on it. The value of the one affects and is affected by the value of the other. Thus a certain type of cheap building in an expensive section may even hurt the value of the lot upon which it is built, and the value of a costly building is seriously lessened by its being put in a poor section. Contrary to the belief of many, expensive buildings cannot create value in cheap land, in cheap surroundings; their value is rather dragged down by the low value of the land upon which they are placed. A costly building, to be a success, must ordinarily be placed in an expensive location. Allowance must be made, however, for "pioneering"; that is, for improvement of sites in advance of their need for higher purposes. Sometimes the erection of expensive buildings on comparatively cheap land anticipates movements of value which have not been realized, and hastens the movements.

The first question to determine, then, in valuing real estate is whether the improvements, if there be any, are suitable. If they are not, they are not only unsuitable; they may even detract from the value of the land upon which they are located. An apartment house in the center of the business district, an old residence or church in high-priced retailing sections—these are anachronisms and detract from the value of the lots upon which they stand exactly the amount it will take to raze them.

How, then, can the suitability or the unsuitability of a building to its site be determined? In the first place a study should be made of the situation and of its possibilities. An indication of the possibilities can be gained by the examination of other improvements in the locality. A cheap two-story building in the midst of twenty-story skyscrapers, or an apartment house in the midst of factories, would be unsuited to its location. But a twenty-story building would ordinary be out of place in the midst of two-story buildings. The building, then, must be adapted to the needs of the location. An examination of surrounding property and of the incomes received from it would enable a judgment to be made as to the suitability of the location for various types of buildings. It may be predicated that the building can secure an in-come similar to that which is obtained by other buildings of similar type in the locality. The number of passers-by and the general character of the district are elements which determine what type of building will be adapted to its location. The dealer is in a position to know property values and from his knowledge of present properties surrounding a building or location which he is examining, he can determine something of the suitability of the building in question to its site.

Another consideration which must be kept in mind is the future possibilities of the location. A building which may be somewhat in advance of its time may be recommended by the dealer when he sees that property values are increasing in the section and if the building will be adapted to its site within a very short time. In dynamic cities where changes are very frequently made, the ability to forecast the direction and rapidity of the growth of a city is a very great asset to the dealer. Great care must be exercised, however, in estimating the future developments of a site, for judgment is likely to be mistaken. It would seem safe to say that the appraiser is justified in saying that a building is suitable to its site if the movement of values is such that an increase in the value of the site is reasonably certain. On any other basis than that of reasonable certainty the dealer's judgment is little more than speculation. Instances can be multi-plied where the judgment of the sanest real estate dealers has been in error regarding the future development of a site. Such prediction, therefore, should not be hazarded until the certainty of-such development is established.

If the buildings are unsuitable to the site, the value of the site cannot be determined by the capitalization of income process, which is to be described. A building whose usefulness is past sometimes will not yield an in-come sufficient to pay even the carrying charges such as interest on bonded indebtedness, taxation and insurance. The capitalization of income, therefore, would yield less than no value for the land, while as a matter of fact the land may be exceedingly valuable but unsuitably improved.

If the buildings are suitable, the value of the lot can be arrived at as follows : (I) Find the net income from the property, after deducting all operation and carrying charges including depreciation and obsolescence. The sum arrived at represents the income from the capital invested in the buildings, and the income from the land itself. In order to get at the value of the land alone, then, (2) estimate the present value of the buildings; then (3) deduct from the net income an amount which represents a fair rate of interest on the value of the buildings. The rest represents the income from the land. If this is (4) capitalized at the going rate for such in-vestments, the result will be the present income-earning value of the land. To this figure must frequently (5) be added something for the anticipated increase in the income-earning value of the site. This factor asserts itself particularly in rapidly growing cities or sections of cities. It also operates to enhance the value of farm lands as indicated above. How greatly it affects an honest valuation is difficult to determine. It should never be allowed to operate outside the bounds of reasonable certainty. When it exceeds that limit, the value assigned becomes a purely speculative one and likely to bring great losses.

Suppose, for example, that a building has been erected at a cost of $15,000. It is leased to a tenant, who agrees to meet all operating and fixed expenses, and pay $2,400 a year rent. What is the value of the lot?

The return here of $2,400 represents the income from both the buildings and the land. But this sum cannot be considered net income. From it must first be deducted a sum to be set aside for the depreciation and obsolescence of the building. If this were not set aside, when the building became useless, the capital invested in it would have been dissipated. Many owners and dealers over-look this, depending upon an increase of land values sufficient to cover the loss from depreciation and obsolescence. The error needs but to be stated to become apparent. From the $2,400 income, something must be set aside for this loss. In modern fireproof construction, two per cent of the value of the building is usually considered a conservative amount for this item. Two per cent of $15,000, the value of the building, is $300. When this is deducted, the net income from both buildings and land is found to be $2,100. Seven per cent on the value of the buildings would be $1,050, the amount which must be realized upon the investment of capital in the building. The remaining $1,050 represents the income from the land, a return of seven per cent on $15,000. The income-earning value of the lot would here be the same as that of the building, namely, $15,000.

This figure would have to be corrected by the knowledge of current sales prices, tempered by the dealer's judgment as to what portion of going prices represents reasonable certainty and what is pure speculation.

This method, besides assuming that the buildings are suitable also takes it for granted that the returns from a property are exactly fair. In cases of long-term leases, where values may have changed since the lease was signed, in other words, when the returns from a piece of property are either higher or lower than the present conditions would warrant, this method would produce a false valuation. But it is, in a case of short-time leasing, an easy rule-of-thumb to apply. The various steps will consequently be explained both for the importance they have in connection with this method, and for their general value to a real estate dealer.

In the first place, what constitutes the "net income" from a piece of property? Obviously, there must be de-ducted from the gross income all expenditures for up-keep, maintenance and repair. These items include: (1) fixed charges, such as taxes, depreciation, and insurance; (2) maintenance charges, such as management, upkeep and decoration, cleaning and janitor; (3) cost of conveniences, such as elevator, heat and hot water, public lights; (4) extras, such as light, refrigeration or iced water, vacuum cleaning; (5) in addition to these operating costs, there must be added an annual cost of vacancies, for few office buildings and almost as few apartment houses constantly bring in a maximum return. All these costs must be found and deducted from the gross income before the net income can be arrived at.

Secondly, estimate the value of the buildings. The ability to do this is indispensable to the real estate dealer. The simplest way to arrive at an approximate valuation of a building which is suitable to its location is to estimate the cost of building a similar one, and then to subtract a proper amount for depreciation and obsolescence. Cost of construction is estimated in two different ways, by cubic contents, or by square feet of floor space. It naturally varies greatly according to materials used and type of construction, as well as with the fluctuating costs of materials and labor. Reliable architects or contractors can at any time give accurate estimates of costs of building the various types of structure in their own neighborhoods.

Depreciation is of two sorts : (1) actual decay of the building, or structural depreciation, and (2) obsolescence or economic depreciation. For a building becomes useless not only through regular wear and tear but also because it fails to perform the service which is needed at the time and place. Examples of obsolescence are found in inappropriate dwellings squeezed up by encroaching business houses, in retail stores used for warehouses, or in apartment houses which have lost much of their earning power because of changes in style of such buildings or services newly added.

In rapidly growing cities, obsolescence is apt to be a greater factor in the depreciation of a building than wear and tear.

It is not possible, however, to generalize concerning the rate of either structural or economic depreciation. The first depends upon materials and upon the state of repair and the second upon a variety of social changes, chief of which is the growth of the community. Consequently authorities vary considerably as to the amount of depreciation to allow.

Another authority gives the following table showing both structural and commercial (or economic) depreciation. Since these are not always the same, and the structural life may not be the same length as the commercial life, the owner must be protected by being covered against the rate which is highest.

It has already been noted that when a building becomes obsolete it is likely to be worthless; in fact, it may even encumber the ground and detract from the value of the lot the amount necessary to raze it. This situation arises not infrequently, especially in a rapidly growing city.

The next step in the valuation process is the determination of interest on capital invested in buildings. A building to be profitable must yield a return on the capital invested in it. A normal rate would usually be about six or seven per cent. In the example seven per cent has been taken.

The final step is that of capitalizing the income which can fairly be attributed to the land after all other costs and charges have been deducted. It consists of dividing the income by the rate of interest which is considered fair. In the example again seven per cent is taken as the basis. The $I,050 income received from the land rep-resents an investment of $15,000 at seven per cent.

Valuing the Unimproved Lot. Now, how can property that is not improved or unsuitably improved be appraised? This must be approached from an entirely different point of view.

In the first place, real estate values in every city reach their highest point on a certain definite street, or at the intersection of certain streets, like State and Madison Streets in Chicago. From this center values decline in every direction, but a definite front-foot value can be assigned to every lot facing on any block of a given street. This value is to be determined by a study of the records of sales in that block, by the capitalization of rents received as has just been explained, by consulting tax assessor's records, and by careful observation; all of these sources must be utilized by the appraiser who wants to arrive at a fair value for a certain street frontage.

Once this street valuation becomes determined, the valuation of the specific lot becomes a matter of applying rather definitely established rules. There are three factors to consider : (1) the width of the lot, (2) its depth, and (3) its relation to the streets.

The unit value in most places is the "front foot," by which is meant a strip a foot wide running the depth of the usual lot in the city at right angles to the street; in
some places it is the square foot. A strip a foot wide, that is, one front foot, running the depth of the lot, would have no value ; it could not be used. So the lot must have sufficient width in front feet to enable it to be utilized, and sometimes an addition to the width of a lot will enable it to be used effectively in some way in which it could not be used without the extra width. The additional value then received is called "plottage." But granted that it is wide enough to be used in the manner common to the neighborhood, the value of the lot is measured by the front foot or by the square foot.

Not every foot of the depth of a lot has equal value; that part of the lot which is nearest the street, because of its accessibility, the opportunity it offers of advertising to passers-by by the display of goods, is of much greater value than the portion which lies at the opposite end of the lot, inaccessible and far away from the traffic. If all lots were of the same depth it would not be necessary to resolve the total value of a lot into its component parts. But as soon as an attempt is made to value a lot that is longer or shorter than the standard, the distribution of the value of the unit must be determined. This can only be found by the study of a great many cases, and those who have given the subject the most study are not agreed upon conclusions. Several rules will be explained to indicate the methods used.

The first rule, and the easiest to remember, is the "4-3-2-I rule." In the application of this rule, the length of a lot is broken into four equal parts and to the part lying nearest the street four-tenths of the value of the whole is assigned ; to the second part three-tenths, to the third, two-tenths, and to the part farthest from the street only one-tenth. Thus in a hundred-foot lot worth a thousand dollars, the first twenty-five feet would be considered worth $400; the first fifty feet $700, and so on.

But this proportion, though easy to remember, is not very accurate. A number of estimates have been made. The most authoritative of these are given here in the form of a table on page 128 for purposes of comparison.

This table represents the valuations of a lot running at right angles from a street. A corner lot in a business section' would obviously be more valuable than an "in-side" lot, because it would receive the benefits from two streets. The advantage of the corner (corner influence) is usually considered to extend one hundred feet toward the middle of the block. This is merely a convenient rule. The distance over which the corner influence will be felt varies. Its value has been debated; Some authorities' say that the value of a corner lot is found by computing its value as facing on one of the streets, and adding to this the full value of a lot of the same width facing on the other street. It seems, however, that this gives a figure which is perhaps a little high. The assessor for Cleveland,' in consultation with real estate dealers and property owners in Cleveland gives the following rule. . Find the value of the lot as facing on the main or higher-priced street; then add to this 72 per cent of the value of a lot of equal width facing on the lower-priced street. It is generally conceded that the relationship of the values on each street affects the amount that should be added for corner influence. Consequently no definite percentage can be assigned for all purposes. Taking into consideration the relationship between the two street values, the same authority gives the following table for quickly finding the value of the corner lot

By "street units" is meant the relationship of values on one street to those on the other. Thus, if the main street was a $1,000, and the side street a $500 street, the "street units" would have a ratio of 2-I, and the value of a corner lot would be between 136% and 150% of the value of an inside lot on the main street.

If the frontage on the side street (the depth on the main street) is less than 100 feet, the following percentage of side street value of a hundred-foot lot is added for the corner influence.

If the lot is in the form of a triangle, with the base on the street and the perpendicular representing the depth, its value is found by extending the triangle into the form of a rectangle and taking the following percentages of the value of the extended rectangle.

With these rules for valuing the simpler forms, it is usually possible to arrive at a value for the more unusual forms by reducing them to component simple forms. Thus the value of a triangle with the apex on the street can be found by first finding the value of a projected rectangle as before, and then subtracting from this total value the value of the projection, found by applying the table given above. Likewise, the value of a trapezoid can be found by dividing it into rectangles and triangles and proceeding according to these tables.

Lots situated in sections where sales are few and consequently values are undetermined must be appraised in the way which seems best adapted to the situation. Thus a lot in an out-of-the-way corner in a section where few lots are sold must be compared with lots in other similar sections whose value may be established by sales. The elements of value lacking in the lot in question must be estimated and subtracted from it. If there is no street, what would be the cost of constructing one? If there are no public utilities, how much would they cost? Is the neighborhood of the lot in question as attractive as the one where the lot with which it is being compared is situated?

At all times the appraiser must use all the means in his grasp to arrive at fair values, and exercise the best analytical powers he possesses. Long practice and diligent study with wide observation make a good appraiser. There is no other method of making one.

SUMMARY

1. The value of real estate depends on the general economic law of supply and demand.

2. The supply of land is for all practical purposes fixed; the demand is constantly increasing because of the increase in population. The value of land is, therefore, constantly increasing. But the increase in value is not in proportion to the increase in population because of improvements that enable greater returns to be received on the same amount of land, and because of the increased facilities for transportation.

3. Agricultural land depends for its value upon its ability to produce agricultural commodities for the market and upon its desirability for residential purposes.

4. In determining the value of agricultural land a careful accounting of income and expenditures must be made. A statement showing these factors must include all expenditures, and all income such as the rent for the residence and buildings. It must also be remembered that the capitalization of income for farms produces a smaller value than the ordinary sales prices because the farm is more than a machine of production.

5. The features which make a site valuable for manufacturing purposes are ; natural advantages, the presence of public utilities, the cost of land, and the availability of homes for laborers. The absence of any one of these factors may affect the value of a site more than it would cost to supply the missing factor.

6. The desirability of a location for wholesale purposes is determined by its accessibility to transportation facilities, the convenience and habits of buyers, and the prestige of the location.

7. Retail values are fixed in proportion to the number of people who pass the location and the consequent opportunity for making sales to them.

8. The value of residential property is determined largely by the character of the neighborhood, the highest value for residential purposes to be determined by the ability of the most fashionable to pay.

9. The value of specific property must be determined by separate valuation of land and improvements, if the improvements are suitable to the location. If improvements are not suitable the value of the land must be determined by a study of the value of similar lots properly improved.

10. The value of land is determined by the capitalization of income which may be derived from it after it has been properly improved.

11. In the valuation of buildings the factors of structural and economic depreciation must be very carefully considered.

12. The value of an unimproved lot must be obtained from an examination of sales records and from the application of unit values to the particular lot in accordance with one of the tables of unit value.

13. The value of a corner lot and of irregular lots may be calculated by applying corner rules and other unit rules.